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Article

Aligning People, Planet and Prosperity

The Role of Investors in Realising a Just Transition
by Fiona Reynolds , CEO, Principles for Responsible Investment | on 09.10.20 | in Just Transitions
HARNESSING PRIVATE SECTOR CAPITAL Mobilising new resources will be mission-critical to delivering Just Transitions. Investors with over $10 trillion under management have signed up to Environment and Sustainability Goals. That’s a start.

A key pillar of the 2015 Paris Agreement, the concept of a just transition weds social inclusion with climate action to ensure that the shift to a resilient, zero-carbon economy is fair and puts people at its heart. In fact, a just transition is a precondition of successful climate action; without the buy-in of all stakeholders, including workers and communities, there will be push-back, as we’ve seen with the gilets jaunes (yellow vest) movement in France for example.

The net-zero transition is already underway, but the pace of change— both from a social and environmental perspective—is far too limited and much too slow. This critical agenda simply will not be achieved in time without a whole of economy response which includes private sector action alongside government policy.

For years now climate change has topped investors’ environmental, social and governance (ESG) agenda. As they increasingly seek to address climate change within their investments, it’s critical to remember that that climate change is as much of a social issue as it is an environmental one.

Investors have an important role to play in driving a just transition and in doing so can ultimately help to accelerate and optimise climate efforts. In their role as long-term stewards of capital, the case for investor action is clear.

As the Grantham Research Institute and Harvard Institute for Responsible investment in collaboration with PRI and ITUC’s guide for investor action explains, there are five strategic motivations for investor action. By aligning with the just transition investors broaden their understanding of systemic risks, reinvigorate fiduciary duty, recognise material value drivers, and uncover investment opportunities, all while contributing to wider societal goals. These five drivers align neatly with investors’ core fiduciary duties and interests and critically, allow them to deliver positive social and environmental outcomes in line with the Sustainable Development Goals (SDGs). By adopting a deliberate approach to support the just transition, investors can honour their responsibility to respect global human and labour rights in line with the ILO’s Guidelines for a Just Transition and the UN’s Guiding Principles of Business and Human Rights.

The levers for impact of the financial sector are significant and having clarity on where and how they can affect change is critical. In reality, much of investors’ impact takes place through others. Firstly, through capital allocation they finance companies whose projects and actions have a direct impact on the world. Secondly, through stewardship with those companies and other investees, they can help to steer that impact. And finally, through engagement and advocacy with policymakers and stakeholders around the world they can help shape key regulations, structures and more.

We already see that investors, both individually and collectively, are using those key levers to drive outcomes on ESG issues, including the just transition. Many investors think about ESG risk and how those risks impact their portfolio, but some are now starting to look beyond this and think about the impact of their portfolio on the real world. In essence, by realigning their strategy to include action on the just transition, investors are adding a third dimension to their role. They move from risk and return to risk, return and impact.

The COVID-19 pandemic and resulting health and economic crisis has highlighted, and in some cases even amplified, the urgency of the just transition and wider social issues agenda. It has exposed the inequalities inbuilt into the global financial system, which deprioritises workers and stakeholders in favour of shareholders.

The fallout of the crisis has disproportionately impacted the most vulnerable social groups, often as a result of their precarious work situations. These people are, for example, workers in the ‘gig economy’ on zero-hour contracts with limited access to sick leave, health insurance and unemployment benefits. Overnight many people found themselves let go with no notice, severance or access to a governmental social safety net.

These fundamental social problems which the virus has brought to the fore are not dissimilar to the issues we can expect to be compounded as a result of climate change if we’re not successful in realising a just transition. Similarly to the social issues we’re expecting from climate change, the impact of the COVID-19 crisis has been placed-based, varying in nature across the world. Both therefore require an understanding of local context to fully tackle.

However, the good news is that in shining such a strong spotlight on these social issues, we can leverage tailwinds to accelerate progress to address them. This opportunity for investors and the wider financial system is further augmented by the unprecedented stimulus packages being rolled out by governments around the world.

At PRI, following the COVID-19 crisis, we’ve found investors more engaged on ESG issues—and in particular social issues—than ever before. Investor awareness and support of the just transition is growing. Today over 161 investors with more than US$10.2 trillion in AUM have signed an international statement committing their support.

The world is finally coming to terms with the reality that without healthy people and a healthy planet there can never be a healthy economy. These three systems are delicately and intricately interconnected. At PRI, we believe investors’ leverage enables them to shape outcomes in the world, and in placing the just transition at the centre of their climate strategies have the power to significantly accelerate progress toward a better, more equal future for all.

This article is an extract taken from the Parliamentary Network publication ‘Just Transitions’. You can download a pdf version of the full document here.

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